Keep track of potential sales tax changes

Washington considers charging online business; Ohio looks at services

Question: We've heard about the new online sales tax and the Ohio tax on services but I'm not sure what (if any) changes have already been or are set to be implemented. What are the current tax change proposals and how will they impact my business?

Answer: There have been a couple of different proposals relative to sales tax in the news lately. The U.S. Senate and Ohio's governor have proposed separate legislation that would raise sales taxes if enacted. Recently, the U.S. Senate approved legislation that targets online sales taxes. The Marketplace Fairness Act (MFA) now moves to the U.S. House but its future remains uncertain. At its basic level the act grants states the authority to compel online and catalog retailers ("remote sellers") with gross sales over $1 million a year to collect sales tax at the time of a transaction - just as local retailers are already required to do. The House must agree to the bill in order for it to become law. If the legislation is passed, there will likely be changes in some of its terms and the effective date will probably be in 2014. The MFA would level the playing field removing an unfair advantage Internet sellers have enjoyed for years. Under current law, online retailers can often charge lower prices than traditional brick and mortar companies that are required to charge sales tax.

Typically, states depend on sales and use taxes for an average of 20 percent of their annual revenue. In addition, sales tax rates vary widely and range from less than 1 percent to over 10 percent. There are a variety of exemptions and exceptions and rates vary across types of goods and services as well as cities and even counties. Most of these jurisdictions are losing sales tax revenue to online retailers so they are encouraging Congress to enact the law. However, many members of the House are opposing the bill stating that it places a heavy burden on online merchants because of additional work involved in calculating and charging the various tax rates.

In Ohio, Gov. John Kasich's proposed budget included provisions to substantially expand sales taxes to include most services. It does not appear likely that either the Ohio House or Senate will include this expansion in their budget bills. The House bill includes a provision for a 7 percent individual income tax rate cut. The Ohio Senate is discussing including a provision in its budget bill that would provide an exemption from tax of up to $375,000 of small-business income.

The small-business exclusion, if enacted, wouldallow a50 percent exclusion (up to $375,000) from income to small-business owners. Privately held businesses are the drivers of our economy, making up roughly 98 percent of all Ohio businesses and employing many of our state's private-sector workforce. However, the method by which Ohio taxes its small businesses that operate as pass through entities (PTE) has been a subject of our columns many times. It appears that there finally may be welcome relief on the way that will reduce the tax burden on Ohio's small businesses that are organized as LLCs, S corporations, partnerships and sole proprietors.

Proponents of this exclusion argue that it will allow businesses to retain funds to continue to grow and help attract new businesses to the state. Currently large businesses, taxed as C corporations, do not pay any Ohio income tax, while small businesses that are taxed as pass- through entities pay tax at their individual tax rates. The 50 percent exclusion would be a step toward equalizing the tax treatment of small businesses in Ohio with that of large businesses.

Unfortunately, we do not know which provisions of the budget bills will pass. However, it makes sense to follow the legislation, particularly if you are considering changes in the tax structure of your business.

The good news is that, unlike the federal government, Ohio is required by law to have a balanced budget. This means that the budget bill will have to be enacted by June 30. ⬛

Tom Cooney and Crystal Faulkner

BusinessWise

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Keep track of potential sales tax changes

Question: We've heard about the new online sales tax and the Ohio tax on services but I'm not sure what (if any) changes have already been or are set to be implemented.